‘Dying civil aviation Industry’
Merger or Sabotage?
If one takes one step beyond
the public-private debate on the air
lines (‘Public inefficient, Private efficient’) there emerges a pattern of systematic attempts at dismantling the merged Air India-Indian Airlines public carrier itself by those very persons entrusted with the responsibility of protecting and furthering its interests. From a monopoly position in the 1990s, Air India is today fourth in terms of market share (17 percent), has a debt burden of whopping Rs 46,000 crore and financial losses amounting to Rs 5,551 crore in a single year (2009-10). Before Indian Airlines and Air India were merged in 2007, the domestic carrier had losses of Rs 280 crore, while Air India had losses of about Rs 455 crore. Within three years of the merger the combined AI-1A accumulated losses have touched nearly Rs 20,000 crore. Although this was done in the name of 'rationalisation' and economies of scale, official bodies such as the Comptroller and Auditor General (CAG) have passed severe strictures on the merger, suggesting that it lacked both strategic foresight and immediate plans about how the two airlines would work together post merger. In a letter dated 13 July 2009, the All-India Airlines Retired Personnel Association accused Praful Patel, the then Civil Aviation minister, of having "single-handedly and systematically stripped the two national carriers—AI and IA—and brought them to the brink of bankruptcy by a series of well planned out manoeuvres... All along, all these actions have been cloaked under the garb of unleashing India's civil aviation potential, even as they struck at the very root of AI's and IA's existence" (Donthi, 2011). The Parliamentary Committee on Public Undertakings in a report of March 2010 described the merger as "an ill-conceived and erroneous decision neither arrived at by the two Airlines on their own accord nor mutually considered by them to be in their best interests."
Heavy Capital Investments
Simultaneously the two airlines embarked on capital investment of such massive proportions that it defies common sense. With an annual turnover of just Rs 7,000 crore, Air India placed an order in 2005 for Rs 41,000 crore worth of aircraft. Initially, Air India had planned to buy only 24 aircraft and Indian Airlines had planned to purchase 43 aircraft, but under the active 'guidance' of Patel, Air India changed its plan within 24 weeks and firmed up a proposal to buy 68 aircraft (Saha, 2011). In 2007, the Parliamentary Committee looking into Air India's acquisition plans of 2005 observed, "Reasons for going ahead with huge purchases by the civil aviation ministry despite Air India and Indian Airlines not having the capacity to support it remain unknown to the Committee. It, therefore, recommends that this aspect needs to be further probed to fix the responsibility for taking such an ambitious decision that has become a big financial liability." A CAG report notes, "From the approval for the constitution of EGoM (Empowered Group of Ministers) by the CCEA (Cabinet Committee on Economic Affairs) for final round of negotiation with lowest bidder, to the signing of purchase agreement, it just took 16 days." In the space of one day—30 December 2005, when the deal was signed—all of the following steps were completed: the Prime Minister saw the note on the final acquisition proposal from the EGoM, headed by the then Finance Minister P Chidambaram, and granted his approval; the PMO forwarded the note, with his approval, to the aviation ministry; the ministry conveyed the government's approval to Air India; and Air India signed the purchase agreements with Boeing. The government obviously can act really fast when it chooses to! Arguably the public carrier needed to modernise given that the AI-IA fleet was 15-20 years old while for airlines like Kingfisher it was less than 2 years old, but the haste and scale of it is mindboggling.
Surrender of Profitable Routes
Even as the two airlines were being merged and such a large fleet of brand new top of the line aircrafts was being ordered, the government began so-called 'route rationalisation'—the surrendering of profitable routes. The airlines industry is a sort of natural monopoly given that air routes are common that are controlled by states (similar to the spectrum whose buying and selling is in the eye of storm currently). Thus the flying rights are governed by agreements between states, often bilateral, which traditionally provided rights to two or three Indian carriers to operate on certain international routes. But given the monopoly of AI-IA before the 1990s, many of these rights, such as the very profitable routes to the Middle East, were vested in the two airlines. The immediate consequence of merger of the two was that such routes became available to be given to private airlines. Some have alleged that this was a driving force for the merger. As All India Employees Guild General Secretary George Abraham said, "After the merger, the two airlines had to share (route) entitlements while the balance was given away to private carriers, it was a clever move to gift the market away (Business Today, 2011)." For instance, the airline had, without citing any reason, sent letters on 8 October 2009 to its stations in Kozhikode, Doha and Bahrain stating that it was withdrawing operations on the route. "This is a route that is referred to as a legacy route," a senior pilot asserted. "We were raking in revenue to the tune of Rs 100 crore per annum of which Rs 40 crore came from Doha and the rest was the earnings from the Bahrain station. Despite all station managers writing to their regional managers to restart operations on this route, the stations managers never received any reply from the management (Saha, 2011)." To substantiate his point, the pilot said, "Next what we learnt was that Jet Airways had started operations on this route, Etihad increased its frequency from three to seven flights a week, Emirates doubled its frequency from seven to fourteen a week. This was one of the most profit-making routes and suddenly we were not on it but other foreign and private carriers were." By an estimate, in 2009 alone Air India/Indian Airlines pulled out of as many as 32 routes which had load factors above 90 percent, mainly in the Gulf and Singapore sectors, and their flights were substituted by Kingfisher and Jet (Skaria, 2011)! As a result against 90 hours of flying per month, Air India pilots are flying an average of 49-53 hours per month. Similarly, the average utilisation of aircraft has also been affected—as against 16 hours of flying per day, aircraft with Air India are airborne for barely 9-10 hours a day. The 2011 CAG report notes that "foreign airlines derived disproportionate economic advantage out of the traffic rights" negotiated in these agreements. In her leaked phone conversation with Jaideep Bose of the Times of India, from July 2009, Nira Radia accused Patel of having profited personally from the expansion in capacity and the conversation goes to the extent of suggesting the price per seat which changed hands in this process and even names specific middle men involved in facilitating the entry of the international airlines. The Caravan quotes a senior official at the Directorate General of Civil Aviation (DGCA), who monitors bilateral agreements, as saying "they say Emirates is India's national carrier these days." Captain G R Gopinath, who launched India's first low-cost airline, Air Deccan, paid a kind of backhanded tribute to the success of Jet Airways under Praful Patel in an October 2011 Indian Express article, writing that Jet had "built a robust international network and secured good international routes that are controlled by the government in bilateral agreements" (Donthi, 2011). In July 2004, Jet acquired landing rights at Heathrow Airport in London, though Indian domestic carriers till then were not permitted to operate outside of ASEAN countries.
On another front, the Air India and former Indian Airlines unions came together in late 2008 to protest the ministry's proposal to transfer ground-handling services to a new joint venture between Air India and SATS, a subsidiary of Singapore Airlines. Ground handling is a lucrative business for AI and a series of agitations and threatened strikes over the ground-handling joint venture forced the government to step back. According to a former ministry official, Raghu Menon, the then CMD, resisted giving his approval to the project, but was sacked by Patel less than a year into his three-year contract. The SATS ground-handling joint venture was subsequently approved by the next incumbent.
After the merger, buying spree and 'route rationalisation', minister Patel summed up his policy in the following remark: "I have been saying since 2004 that the airline (AI-IA) should be sold, but I have been asked to keep it going" (Business Standard, 2009).
Of late, Kingfisher Airlines has been regularly in the headlines but only for the wrong reasons. The second largest airline in the country (till last year) has been continuously making losses, its debts are mounting, and the list of those whom the airline is unable to pay seems to be growing by the day: employees, fuel suppliers, aircraft lessors, airports, income tax authorities, and so on. But the problems of Kingfisher have not been recent. It has been a loss-making entity ever since it was launched in 2003, and has accumulated losses of close to Rs 6,000 crore at present. Amidst all the recent trouble, the high profile chairman of the airline gallantly announced that it did not need any largesse from the government and could take care of itself.
In 2010, when it was in a similar mess, Kingfisher got its debt 'restructured'. At that time Kingfisher's total debt was Rs 7,650 crore. Public sector banks decided to convert part of the debt into equity to give the company some breathing space, as equity would not require any interest or instalment payments. That is, the public sector banks bailed out this private company which was on its way to bankruptcy, by taking shares in Kingfisher in exchange for writing off part of the debt. The bankers converted approximately Rs 750 crore into equity and acquired a 23 percent stake in the company. The whole transaction was done with each Kingfisher Airline (KFA) share being valued at Rs 64.48. But the share price of Kingfisher that day was only Rs 39.90; the failing airline got an incredible premium of 61 percent per share, depriving the public sector banks of almost Rs 300 crore. In addition Rs 553 crore of debt was converted to Compulsorily Redeemable Preference Shares (CRPS), again at Rs 64.48 price per share, which meant that banks allowed KFA to return this money on a later date, but the amount would not be reflected in KFA's debt column. The stated logic of the banks for paying a premium for the Kingfisher shares was the future 'potential' of the airlines and the aviation business. But since then the highest price that the share has ever fetched has been Rs 49.25, around a year back; and amid the current crisis it has dropped to less than Rs 14 in May 2012, adding another Rs 300 crore to the freebie offered by the public sector banks to Kingfisher. The banks also reduced the interest rate on the rest of the debt by 2.5 percent meaning a further loss of Rs 150 crore per annum in interest income, over the term of the loan. After all this the airline was also given additional term loans of Rs 1,000 crore as part of the same 'debt restructuring' exercise. All this was offered by the financial institutions to a company for which the auditors in its own annual report in 2010-11 were forced to state: "the financial statements of the Company having been prepared on a going concern basis, notwithstanding the fact that its net worth is completely eroded."
In September 2011, a Canadian research firm, Veritas, published a report on Kingfisher Airlines (KAIR) which stated the true picture:
'We believe that KAIR's book equity has been wiped out although audited financials pretend otherwise. The airline is burning cash at a rapid rate, we estimate Rs 301.10 crore ($65 million) in the first quarter of 2011-12, is in a business that requires capital perpetually, has no pricing power given six carriers fighting over the major hubs in India, is dependent on the vagaries of the price of oil and the largesse of state-run financial institutions in India, and its parent UB has run out of financial room to accommodate the needs of this capital-starved child.
Moreover, in spite of the so-called debt recast, we believe that once the non-cancellable operating and financing lease commitments of KAIR are included, KAIR's enterprise value is less than its contractually required cash obligations, implying negative residual equity value for KAIR...'
KAIR owes substantial sums to employees in wages, employees state insurance, and provident fund. According to its auditors, KAIR owes the exchequer Rs 423 crore in tax deducted at source (TDS), Rs 10.5 crore in service tax, and Rs 4.5 crore in fringe benefit tax. It owes the public sector oil corporations some Rs 800 crore. "Clearly", says Veritas, "Kingfisher is funding itself at the expense of its employees and the Indian exchequer.... We do not believe that KAIR's antics would have found any takers in a responsible credit market... the airline would have been liquidated by now." Interestingly, Veritas even comments that the government's behaviour with the public sector Air India has been "duplicitous": "Our view stems from the fact that it could be on the diktat of the regulatory authorities involving various ministries of the Government that an unviable airline, KAIR, which is competing against the incumbent state carrier and siphoning away its passengers on both the domestic and international routes, is being supported via taxpayer-funded financial institutions." Veritas points out that Kingfisher's parent company, UB Holdings Ltd, has provided loan guarantees of Rs 16,853 crore on behalf of Kingfisher—compared to UB's marketable assets of Rs 4,713 crore. It recommends that financial institutions auction the collateral to the highest bidder and recoup whatever is left. However, even after the appearance of this report, Kingfisher's public sector creditors did nothing to protect the public interest. The eventual loss, of course, will be borne by the public. Veritas notes that "unless the banking institutions have provisioned judiciously for the debt provided to KAIR—approximately Rs 4,567 crore ($986 million) in loans to Kingfisher in addition to standby letters of credit, etc it renders the disclosed capital position of the banks unreliable." Partly because the capital of public sector banks has been eroded by non-performing assets, including corporate firms like Kingfisher, the government has spent vast sums to recapitalise the banks : On top of Rs 18,617 crore in 2010-11 and Rs 12,000 crore in 2011-12, it plans to spend Rs 14,588 crore in 2012-13 on this head.
Most interesting is the company's response to the crisis: while bravely stating that it does not need any state support, it has regularly been ascribing all its woes to Government policy (taxation and regulation). This is the case when Kingfisher and Jet Airlines have been the principal beneficiaries of Praful Patel's systematic sabotage of the public sector airlines. (One of Mallya's complaints has been the tax on Aviation Turbine Fuel—a tax that existed when he and other private firms entered the airline industry, and which his business model was supposed to take into account.) Under corporate capitalism, corporations can indulge in the worst form of profligacy, get repeatedly bailed out by public money, and yet continue to put all the blame on 'unfair'/'inappropriate' public regulation! Note that all the trouble of Kingfisher has made little difference to the profile of its Chairman Vijay Mallya, who is in his second term as a member of the upper house of parliament. All these handouts have been doled out while Kingfisher's promoters had surpluses to invest in the Indian Premier League, Formula One, football clubs, swimsuit calendars and even derby teams. Mallya's lifestyle is among the most ostentatious of the ostentatious Indian elite: he is reported to own several private jets, luxury yachts, homes in several cities and world capitals, even private island near Monte Carlo.
In spite of all the hype about the rapid growth of civil aviation in India with the entry of high-profile corporate players, there seems to be no end to the crisis of the industry as a whole. The current debt burden of the airline industry is close to Rs 100,000 crore ($20 billion). On a revenue base of approximately Rs 50,000 crore the industry is expected to book losses of Rs 12,000 crore this year (2011-12). While the traffic has been growing at the rate of 15-20 percent per annum, and the Indian aviation industry has become one of the top ten in the world, it has not made any profits in the last five years. Along with the financial condition of the airlines, their safety standards too have deteriorated alarmingly: a recent report by the Director General of Civil Aviation finds that almost all the leading airlines in the country—Jet Airways, Kingfisher, IndiGo, SpiceJet, GoAir, Alliance Air, JetLite and Air India Express—are guilty of lapses such as non-reporting of incidents, lack of pilots, lack of proper and regular training, absence of qualified safety officials, non-compliance of safety audits, and other irregularities. The DGCA notes that the financial sickness of the sector is "seriously impacting the safety of flight operations".
In the early years of the economic reforms people were told that increase in competition and deregulation would address all the ills of the industry. The gradual deregulation of the industry began in the late 1980s with granting of permission to private sector players such as Air Sahara, Jet Airways, Damania Airways, East West Airlines, Modiluft and NEPC Airways to operate as air taxi services. In 1994 the government repealed the Air Corporation Act and in 1995 granted scheduled carrier status to six private air taxi operators. However, not many operators were able to continue their business and by 1998, at least six private airlines, East-West, Modi-Luft, NEPC, Damania, Gujarat Airways and Span Air were closed down (Shah, 2007).
Now it is being said in the industry circles that 'unregulated competition' is precisely the problem, and the clamour for state regulation (of course of the kind which can protect and promote private profits) is increasing by the day! Each airline kept making big investments and reduced fares in an attempt to gain market share and drive out competitors. The eventual aim was to be one of the two or three survivors, who would then jack up fares and recoup losses—something very similar to what happened in the railroads and steel industry in the US earlier. (In particular, private firms anticipated that the surviving firms would be able to take over or carve up the public sector firm Air India, promising a huge bonanza in market share and assets.) As a result the industry is not only saddled with overcapacity (over 30 percent), but unsustainable losses as well. According to a recent estimate, against a daily traffic of 150,000 airline passengers in India, the airlines have a combined capacity of more than 200,000 passengers; they also have close to 40 per cent cargo capacity that remains unutilised (Bhan, 2011). The Indian airline industry is able to keep its planes in the air for less than nine hours a day, compared to top international carriers, which routinely achieve close to 17 hours of flying per day!
Unlike the US railroads, which were an essential infrastructure, the airlines in India are largely a luxury industry. As Bidwai (2008) asserts, "the airlines (in India) nurtured and spread the illusion that air travel would become affordable for 'the common man' through sheer expansion and economies of scale." Thus many airlines set their fares deliberately low to draw passengers away from rail travel, in the process missing the point that 'economies of scale' are relatively small in the aviation industry, where fuel accounts for more than 40 percent of operating costs. Moreover, in spite of the high rate of growth in the number of passengers flying, the industry has not been able to reach more than 3 percent of Indians. In line with the pattern of the Indian economy, air traffic is structurally concentrated: the Delhi-Mumbai route carries over half of India's 33 million passengers traffic per annum (Shah, 2007). Air travel remains luxury consumption for many even amongst this small stratum, making them extremely sensitive to prices.
The dominant players in the Indian aviation industry have attempted to move towards consolidation and control through mergers and alliances. Besides the AI-IA merger, 2007 saw two other mergers amongst the key players: the Jet-Sahara and the Kingfisher-Deccan, which meant that over 80 percent of the market was controlled by just three players (till the recent freefall of Kingfisher). There have been regular reports of code-sharing by the top players whereby an airline sells seats, under its own name, on another carrier's flight. Also, there have been repeated attempts at price fixing by the two top players, Jet and Kingfisher (between them the two have had close to two-thirds of the market). The intensification of the crisis in the civil aviation industry in India, most acutely expressed in the condition of Kingfisher, is bound to result in the reduction in the number of firms operating (either through mergers or bankruptcies); in the wake of this 'consolidation', the surviving firms will have greater 'pricing power', i.e., they will be able to jack up fares in a coordinated fashion.
When discussing the socialisation of the costs of airlines, one has restricted ourself to financial operations. Also most critics have ignored the externalities involved in carbon emissions due to air travel, or for that matter, huge pollution involved in bauxite mining and aluminium smelting (aluminium is one of the main constituents of aircrafts) which is being resisted worldwide and for which some of the poorest people in the world, who will never travel by air, and the future generations, will pay.
Contrary to the assertions by the dominant discourse, the rise of corporations did not result from their greater efficiency; if they appear to be more efficient than the alternatives, this is only because the arguments in their favour are structured in a certain manner and facts are mustered selectively to buttress these arguments. The history of the rise of corporations is actually one of great inefficiency and anarchy of investment (at the macro level and in social terms); use of the state as an instrument of private accumulation, oiled by corruption; emergence of monopoly with the help of high finance; and suppression of viable alternatives. While voices against corporations are regaining momentum from Occupy Wall Street to Tahrir Square to Niyamgiri hills, it is time to investigate the real history of corporations, in order to bring out their social inefficiency and obsolescence. o
[Source : Aspects of India’s Economy, 52, RUPE]
Vol. 45, No. 10, Sep 16 -22 2012